Many people cheered when the images of Martin Shkreli, the CEO who raised the price of a life saving drug by 5000%, was hauled off by federal law enforcement in handcuffs. However, Shkreli was arrested and later charged with questionable business practices relating to his time as a hedge fund manager and when he ran Retrophin, his first pharmaceutical company. Federal officials say Mr. Shkreli was operating a quasi ponzi scheme in which he used money from his company to pay investors who were losing money in his hedge funds. Officials called his business dealings a “securities fraud trifecta of lies, deceit and greed.”
Ponzi schemes, once unraveled, are often sensational news stories leaving many people asking how so many people could have been duped. To understand how people are lured into ponzi schemes it is essential to understand how these schemes operate. Often referred to as “rob Peter to pay Paul” scams, ponzi schemes lure investors with promises of high returns and very low risks. The creator of the scheme uses money brought in from new investors to pay off old investors, so it appears to the lucky few initial investors that that the scheme is a legitimate operation. However, as the cycle continues, the earlier investors want to see higher returns, and the new investors will also expect to begin seeing returns. Without a constant stream of new investors bringing in new money to pay the older investors, the scheme will collapse.
There is no actual criminal statute at the federal or state level that defines a ponzi scheme. Instead, creators of such schemes are often indicted on a variety of fraud charges by the Securities and Exchange Commission (SEC) and federal government. As in Mr. Shkreli’s case, operators of failed Ponzi schemes are often indicted on charges brought by the SEC and federal law enforcement. Mr. Shkreli was charged with multiple counts of Conspiracy to Commit Fraud under Title 17 of the United States SEC § 240.10b-5. He was also indicted on multiple counts of Securities Fraud in violation of 15 U.S.C § 78j(b) and 78ff. If convicted, he could face possible prison time, large monetary penalties, and seizure of his assets. Punishments are generally calculated by the amount of loss to the victims in each case.
Attorney Joe Edwards has represented numerous white collar clients in state and federal court who have been charged in ponzi schemes, tax and mortgage fraud, and insider trading. If you need an attorney in one of these matters do not hesitate contacting attorney Edwards at 614-309-0243.